The importance of regulating in the

FinTech’s world for the protection

of consumers

Călin Rangu

Business Conduct Director, Authority of Financial Supervision

Vice-president InsurTech Task Force,

EIOPA-European Insurance and Occupational Pensions Authority

1. Who are the customers, and what

to protect

2. How to regulate and supervise the

technological innovation in financial

sector

Summary

3

Who likes tech changes?

• Customers, they have needs for better services

• Digital customers, more and more eager technologyconsumers

• The companies themselves, partially, for sustainablecompetitive advantage need

• IT staff or tech companies, where the focus is ontechnology, and less on technology as a real businessfactor

4

But…what for?

• Personal well-being – the goal of finance, to assure prosperity anddevelopment

• Customer satisfaction – for a better and qualitative experience

• Financial inclusion – more people to have access and lower prices

• Cost reduction – automate, standardization

• Profit increase – business enabler

• Market share – distribution channels, customer satisfaction

• For compliance– Solvency II, IDD, MiFid, PRIPs etc.

Opportunities

and challenges

Opportunities for

industry

Challenges for

industry

Financial inclusion or exclusion?

Price optimisation: fair treatment of consumers?

Data accuracy and spurious correlations

Privacy issues and data ownership

Non-digital population left behind

Less comparability of (individualised) products and prices

Supervision of algorithms

Personalised products and services

based on own needs and

characteristics

Better customer experience

Empowerment

Addresses information

asymmetry/transparency

Enhanced competition: reduced

prices

Risk mitigation and prevention

New competitors: defeat or ally?

IT Flaws

Cyber risk

Access to data: data oligopolies?

Employment

Legacy issues

Insurance business model to be re-

thought?

Fragmentation of the value chain

Cost efficiency

Enhanced risk assessments

“Regtech”

Targeted and individualised advertising

Improve their customer’s experience

Direct access to customers

(disintermediation)

Fight against fraud

Challenges for consumers

Opportunities for

consumers

Source: EIOPA

5

6

Challenges for

financial companies

Today‘s challenges for financial leaders:

• Regulations,• Market, and• Technology

We will speak about information technologyinnovations. But…..

“Prediction is very difficult, especially about thefuture.”

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What does tech change?

Ex: Big Data impacts all stages

of the insurance value chain

Product design and development

Usage-based insurance products (e.g. car telematics or health wearables)Tailor-made product and servicesNew products: cyber insurance products

Pricing and underwriting

• Enhanced risk assessments

• New claims drivers and predictive models

• New non-risk based pricing techniques

Sales and distribution

• Automated advice

• Disintermediation of sales processes

• Increased frequency and customer interaction

• Gamification

Post-sale services and assistance

• Smartphone applications

• 24/7 service, accessible form any location

• Chat boxes and artificial agents

• Geolocation and personalised warnings in case of flood, storm, hail, etc.

Claims management

• Enhanced fraud analytics

• Accurate information about the accident and its dynamics (e.g. photos, geolocation etc.)

• Picture recognition (e.g. car damage or facial recognition) and automated loss adjusting

Source: EIOPA

8

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New business models +

Greater risk to disruption +

Cybersecurity +

Increased complexity +

New threats +

Many unknowns

What does tech inspire?

Age Childhood Teenage Adult Retirement

Even

tsin

life

Games

WishesWishes

Studies

Fun

Family

House

Jobs

Holidays

Retirement

Nephews

Unexpected events in life include losing the job, accidents, illness

- - - - - - - - Common elements – importance of financial planning - - - - - - - -

- Incomes - - Expenses - - Risk - - Responsabilities - - Wishes -

Authorities should protect consumers, to fulfil their well-being, classical or digital!

Consumers’ Protection

For All Life Cycle

• the right to be informed –transparency, to allow access to information of interest in

order to adopt rational decisions etc.

• the right to know their rights and obligations - to provide information dedicated to

consumers and to conduct informational and educational campaigns, clear and

formulated in a language close to them (simple and concise).

• the right to negotiate and pay a fair price, to compare prices between prices -

ensuring that no monopoly or abuse, fraud, lack of transparency, misleading

advertising, malpractice, etc. cases appear or unauthorized activities occure.

• the right to receive assistance - providing assistance to consumers through an

accessible and free of cost system.

• the right to complaint and access to a dispute resolution system - restoring legality

and normality situations.

What rights do we protect?

Yin & Yang of consumer

protection

➢ Preventive actions vs Reactive actions;

➢ Prudential Regulation vs Conduct Regulation

➢ Classical protection vs Business Conduct Supervision

➢ Bottom-to-Top op vs Top-to-bottom approach

➢ A value chain model applied, by an integrated, functional and efficient

organizational framework

➢ Smart regulation and supervision starting from innovative public policies

and strategies in an innovative new world

ConsumerDetriment

lack of

processes, poor

processes,

organizational

problems and

non-governanceproduct and

activity faulty practices, bad

POG

conditions for employment

and job security, staff profesional

developmentcustomer treatment,

faulty processing of

data relating to them

internal & external frauds,

Conflicts of interest

interruption of operation and

malfunctioning of the systems, cyber-threats

Classical sources of consumer

detriment

People

Systems

Processes

Externalevents

Legal risks

ConsumerDetriment

Cyber-

risksData

manipulation, ethics and personal

protection issues

Perversiveinformation, fake-news

Technicalissues in

operations

On-linefrauds or legal

avoidance

Financial exclusion

Sources of consumer detriment

generated by financial technologies

Analyzing post-loss & causal factors, all faulty eventsthat had a good chance of being prevented ordetected if …

…Aggregate, analyze and escalate Key RiskIndicators (KRIs) providing ‘closer to real timeinformation’ using …

… Innovative technologies for prevention, structured& unstructured data analytics, pattern recognition, AI,etc.

Supervision and Management

of risks using technology

1. General principles of regulation and

supervision of consumer protection

2. How to regulate and supervise the

technological innovation in financial

sector

Summary

How?

Creating FinTech HUBs at the level ofnational authorities

A controlled development of the new innovative technological products or services

- assure market stability

- protect the consumer/user

for

to

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Disruptive Forces managed by

FinTech Task Teams

at financial authorities level

➢ Cyber Risks: to better understandthe risks, and the cyber impact

• new opportunities and challengesthat cyber risks imply for the sector

• a sectorial vulnerabilities analysis

• potential build-up of risks andconsumer protection

• mitigations and extended activedialogue

➢ Big Data: review of the use, seeking to gatherempirical evidence on the use of Big Data inareas such as pricing, underwriting, claimsmanagement, sales and/or marketing

• the benefits and potential risks to fairtreatment of consumers

• assessing the boundaries of potential ethicaland privacy issues arising from enhancedconsumer profiling techniques and moregranular risk assessments

• the impact of Big Data on the availability andaffordability of insurance for consumers

EIOPA and more national authorities set-up FinTech teams to manage topics as:

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FinTech Task Forces (2)

➢ Convergence on supervision of algorithms

- to assess the design and use of algorithms to

determine how the functioning of

increasingly complex analytical IT tools and

processes (e.g. artificial intelligence or

machine learning) can be best supervised

and/or communicated to consumers.

➢ Distributed ledger technology (DLT) /

Block-chain:

• explore the benefits and risks arising from

the use of block-chain and smart

contracts for financial companies and

consumers,

• assessing possible regulatory barriers

preventing the deployment of this

innovation.

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FinTech Task Forces (3)

➢ New value chain and business models:

• supervisory challenges arising from the new

business models and the possible

fragmentation of the value chain.

• the increasing collaboration between

financial companies and non-regulated firms

(data vendors or cloud computing service

providers).

➢ Innovation Hub:

• to develop a European Innovation

Hub.

• a structured framework where NCAs

and FinTech firms would regularly

exchange experiences and provide

guidance

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FinTech Task Forces (4)

➢ RegTech: the impact in the context of

regulatory monitoring, reporting and

compliance

• assessing how Big Data and other

innovative data-analytical tools could be

used for supervisory purposes in order to

capitalize on the new data-reporting

requirements

• Collaboration with start-ups and other

entities for their data analysis capabilities

➢ Mapping supervisory approaches to

FinTech - establishing efficient and effective

supervisory practices.

• how the principle of proportionality is being

applied in practice specifically in the area of

financial innovation (e.g. regarding FinTech

start-ups such as P2P insurers)

• identifying possible regulatory barriers to

financial innovation

ASF Romania InsurTech HUB

OBJECTIVES• Presenting the best practices in the field;

• Stimulating innovative technologies favorable to consumers; developingregulation and supervisory resources and the development of the insurancemarket;

• Monitoring of innovative technologies development from the perspective of:– the current regulations and those required to be applied in the future;

– the conduct of companies that promote such solutions and

– the conduct of entities that use innovation technologies and solutions.

• Supporting innovative technologies development in a controlled andconsumer-friendly manner with the protection of their rights and interestsfrom the perspective of digital identity, dematerialized assets and personaldata.

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❑Romanian Financial Supervision Authority (ASF) set-up an InsurTech HUB

InsurTech HUB Romania

ACTIVITIES

• Proposals to support innovative technologies in insurance, including the

required regulation;

• Providing ASF’s support to insurance undertakings, technology companies

and hubs to understand and enforce the regulation;

• Supporting the application of innovative technologies;

• Facilitating collaboration with the insurance / reinsurance market entities to

exchange information on technological issues that support better regulation;

• Publishing information, recommendations.

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Encouraging responsible innovation

at each stage of development

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• Promote the generation of ideasIdea stage

• Facilitate the process of compliance

Compliance stage

• Test how the idea works in practice

Implementation stage

Expansion stage • Facilitate expansion to all market

Idea stage

• Networks or forums

– Exchange ideas for applications and initiate research

– Share emerging trends

– Facilitate synergies (e.g. incumbents and start-ups)

– Identify regulatory barriers

– Brainstorming to solve specific market problems

• Support units

– Encourage innovation in a specific area

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Compliance stage

• Innovation hubs

– Support to identify relevant regulation

– Support in how to comply with regulatory requirements

– Hub and spoke model

– Dedicated advisers

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Implementation stage

• Regulatory sandboxes – THE MAIN REGULATION TOOL– Test new ideas in a controlled environment

– Provide feedback to adapt an idea or a regulation

– Entry requirements include that an idea is innovative and that theconsumers will benefit from it

• Types of flexibilities offered– Temporary license or exemption

– Non-applicability of certain rules

– Tailored regulations

• Consumer protection maintained– Suitability rules

– Access to redress

– Qualification requirements

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Challenges

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• How does promoting innovation fit?

Mandate of oversight body

• Knowledge, identifying barriers and how regulations should apply

Keeping up with innovation

• Financial institutions-focused regulation, local ownership, paper requirements

Structural issues

• How to promote a culture of innovation outside of hubs?

Institutional culture

• Interpretation of regulation, variety of InsurTech

Consistency

• Demand for regulatory support may exceed supply

Capacity

Key to success: Engagement

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Capacity

• Resources and networks

• International approach

Consistency

• Consistency in the application of regulation

• International cooperation to limit regulatory arbitrage

Culture

• Organizational support and buy-in

• Adaptability to change

THANK YOU! Q&A

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